Bank of England Warns of 'Sharp Correction' Risk from AI Bubble
Citing stretched valuations and high expectations in the tech sector, the central bank flags increased risk of a market downturn.
The Bank of England has issued a stark warning that the risk of a '' has intensified, pointing to potentially unsustainable and stretched valuations in the booming artificial intelligence sector.
The central bank's latest assessment highlights the vulnerability of equity markets, which are hovering near all-time highs. This rally has been significantly driven by a handful of U.S. technology giants, with the top five S&P 500 companies now accounting for nearly 30% of the index's value—a 50-year peak. The concern is that lofty investor expectations for AI's immediate impact may not be met, leaving markets exposed to a rapid re-evaluation.
According to the Bank of England's report, several downside factors could trigger a downturn. These include slower-than-expected AI adoption, rising competition, or significant bottlenecks in essential infrastructure like power and data supply chains. '' could particularly harm companies whose revenue forecasts are heavily dependent on massive AI-related investment.
While some analysts, including those at Goldman Sachs, believe strong fundamentals currently support tech valuations, the Bank of England's cautionary note adds to a growing chorus of concern. Federal Reserve Chair Jerome Powell has also previously commented on 'fairly highly valued' assets in the market. The central bank concluded that the combination of AI exuberance, geopolitical tensions, and other means markets may not have fully priced in adverse outcomes, increasing the likelihood of a sudden shock that could ripple through the global economy.